Welcome to Mortgage Rundown, a quick look at the real estate finance landscape in Canada from mortgage strategist Robert McLister.
The bad dream of COVID-19 has further clouded the outlook for mortgage rates.
As Omicron threatens Canada’s recovery, many adjustable rate mortgage holders now expect – and hope – that the Bank of Canada will keep rates lower for longer. Expectations in the bond market, however, suggest that the variable rate portion will not be extended for long.
Investors now expect the Bank of Canada’s first rate hike by April, in line with the expectations of leading economists and the BoC’s own forecast. Last week, market prices suggested a hike in March – those implied rate forecasts are changing like the wind.
Either way, the market clearly doesn’t think Omicron will postpone rate hikes as much as Delta. That also hasn’t stopped the U.S. Federal Reserve from forecasting two more hikes in 2022 (three in total) in its rate announcement on Wednesday. And with the prices of housing, food, clothing and just about everything you need soaring, can demands for wage gains be far behind?
Once the central bank is convinced that rising wages are fueling significantly higher price levels, it will have no choice but to raise rates to keep inflation expectations anchored at nearly 2%. . The questions will then focus on the pace and extent of rate hikes.
The more interesting question is not when rates will go up, but by how much. And the answer may have changed this week.
Visions of a never-ending pandemic and fears of inflation dramatically exceeding incomes have driven U.S. consumer confidence to an almost ten-year low, according to the University of Michigan Consumer Sentiment for the United States. United And in case you were wondering, American sentiment is impacting Canada rates.
Add the fact that so many people are struggling with debt these days, and it’s harder for a recovery to sit back once rates start to rise.
That’s why it was not surprising this week to hear the Bank of Canada say neutral interest rates “are lower than in the past and likely will stay that way in the future.” The neutral rate is “the interest rate at which monetary policy neither stimulates nor restrains economic activity,” he said.
After its new mandate on inflation this week, the bank reiterated that it may have to keep interest rates low for longer. He followed up on Wednesday by noting that he is “likely to lower his policy rate to the effective lower limit (0.25%) more often in response to [economic] shocks.
RBC Dominion Securities wrote this week that the bank’s new framework implies “a final rate of no more than the 1.75% reached in the 2017-18 hike cycle.”
Ahead of a rate hike cycle in 2022, that’s about as favorable an outlook for variable rates as you’re going to get.
Indeed, the variable is where risk-tolerant and financially secure borrowers want to be – long term. This is especially true after the prime rate has already risen between 75 and 175 basis points, which, according to history, is when the odds overwhelmingly favor the variable. (There are 100 basis points in a percentage point.)
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In 2022 and 2023, however, inflation may not be as short-lived as the Bank of Canada thinks. We must not forget that the bank is not clairvoyant. He has continually underestimated the problem of inflation in Canada.
The risk is that the rates exceed the neutral rate estimated by the bank and penalize variable rate borrowers. This is partly why fixed mortgage rates are still relevant to so many people.
To sum up the Omicron effect, it will likely be more fleeting than inflation. If price levels do not cool significantly by spring 2022, the central bank could be forced to repeatedly tighten monetary policy more than expected, despite Omicron holding back growth in the near term. .
Quiet week on the tariff front
Despite a sharp decline in bond yields – which usually lead to fixed rates – the lowest available five-year fixed rates nationwide have remained stable. Fares tend to be sticky during the holidays. We may see a few lenders and brokers cutting fixed rates before New Years, but I wouldn’t expect much improvement from the lower rates.
Variable prices aren’t going anywhere fast until the New Year. Variable rates are still around 130 basis points cheaper than five-year fixed rates. This initial rate advantage continues to attract borrowers, especially with Omicron clouding the economic outlook.
Mortgage brokers and credit unions offer some of the lowest insured and uninsured rates in the province. Google âthe best five-year fixed rates,â for example, and you’ll find the cheapest five-year deals.
The rates shown in the table are as of Dec. 15 from providers who lend in at least nine provinces and advertise the rates on their websites. Use these rates as a guide to the maximum an average creditworthy borrower should pay. Insured rates apply to those who buy with less than 20% down payment or to those who transfer a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $ 1 million and may include rate premiums applicable to lenders.
this and that
Â· On Friday, Canada’s banking regulator is set to announce the minimum interest rate borrowers must prove they can afford a federally regulated mortgage. It now stands at 5.25 percent. With the Bank of Canada hinting at lower rates for longer and fears of a housing bubble, the question is by how much the Office of the Superintendent of Financial Institutions will raise the minimum allowable rate to protect the banking system from the overvaluation of housing. My guess is an increase of 15 to 45 basis points.
Â· The latest data from the Canada Mortgage and Housing Corporation shows that 53% of homebuyers in 2021 were first-time buyers. Most first-time buyers tend to be much more sensitive to rate hikes than regular buyers.
The government’s proposed 1% âunderutilized housing taxâ alone will do little to slow home prices. But the tax, which targets foreign buyers, may combine with higher rates and an increased federal mortgage tightening (if that happens, as I expect) to dampen homebuyer sentiment in 2022. Of course, rates aside, the two main drivers of home prices remain record high. low housing stocks and household formation that dominates the G7. A tax that only applies to a very small percentage of home buyers makes almost no sense in addressing the supply shortage.
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